The current spot rate of Canadian dollar is $0.98 and 180-day forward rate is $1.12. Interest rates of the two countries are as follows. Assume that borrowing rate and lending rate are the same each other in both countries.

Interest rate (annual)

U.S. dollar 2.5%

Canadian dollar 4.5%

(1) Compute the annualized forward discount or premium for the Canadian dollar. State whether your answer is a discount or a premium.

(2) Suppose that the L.A. bank attempts to make profit by taking advantage of the situation given above. The bank is capable of borrowing either 1 million US dollars or 2 million Canadian dollars. Describe the steps to take to make profit and compute the amount of the profit.

Answer rating: 100% (QA)

1 Forward premium 112 098 098 360180 100 2857 2 Borrowing 1 million us Amount pa... View the full answer